Lloyds Banking Group has made more than £3bn from sales of UK government debt,
helping the state-backed lender offset the cost of billions of pounds of
customer mis-selling claims.

The lender made a gain of £3.2bn from in 2012 from selling tens of billions of pounds of gilts, including a £1.9bn profit in the final three months of the year.

Lloyds reported a pre-tax statutory loss for last year of £570m, largely as the result of £3.98bn of provisions against payment protection insurance and interest rate swap mis-selling claims. Without the gains from the gilts disposal the bank would have reported a loss of about £3.7bn.

“The statutory loss would have been materially worse,” said analysts at Canaccord Genuity.

“Lloyds’ timing has been highly opportune and it has avoided what would have been an awful loss,” said Ian Gordon, at Investec Securities.

The bank is likely to have bought the UK government bonds about four years as banks came under pressure to increase the amount of liquid securities they held on their balance sheet to provide emergency funding in the event of a new financial crisis.

Since then the gilt market has boomed as investors have seen the UK as a relatively safe haven during the eurozone crisis. This year they have seen their value fall as sterling has come under pressure.

One source estimated that Lloyds decision to sell a billions of gilts in the fourth quarter likely meant the bank was about £700m better off today than if it had held the position based on current valuations.

Lloyds has taken the largest hit so far of any major British bank from mis-selling scandals. Yesterday it said it had taken a further £1.8bn provision against PPI in the fourth quarter, taking the amount of money set aside last year to pay claims to £3.58, meaning the bank’s total bill for the scandal now stands at close to £6.78bn.

On top of this, Lloyds said it had now put £400m against the cost of redress for small businesses mis-sold interest rate hedging products, but noted: “A number of uncertainties remain as to the eventual costs given the inherent difficulties in determining the number of customers within the scope of the review and the average compensation to customers.”

Despite the losses, Lloyds said it would be paying out £365m in bonuses, including a £1.49m bonus for chief executive, Anotonio Horta-Osorio.

Mr Horta-Osorio’s all-share bonus is deferred for five years and will only pay out if either Lloyds’ share price trades consistently above the taxpayers’ break even price of 73.6p, or if the state is able to sell at least one-third of its 39.2pc stake in the bank at an average price of more than 61p.

The conditions raised speculation that the government could be looking to sell some of the Lloyds holding before the next election, leading the bank’s shares to trade down more than 8pc at some points during yesterday’s trading session in London. Lloyds shares closed at 53.25p, down 2.24pc.

However, the Treasury attempted to cool speculation that a sale might be imminent.

“Today’s results show that it [Lloyds] is making strong progress in improving its core underlying performance and strengthening its balance sheet, but that there is still work to be done as it continues to deal with the legacy of the past,” said a spokesman for the Treasury.

The scale of the new PPI provisions are expected to lead to further clawbacks of bonuses from former Lloyds managers, including former chief executive Eric Daniels. Mr Daniels last year had a large part of his deferred pay from the bank reclaimed due to the cost of PPI and Sir Win Bischoff, chairman of Lloyds, confirmed the bank was considering taking back a “similar” amount of his bonus this year.

Mr Horta-Osorio slapped down comments last month by Mr Daniels that Lloyds had been “on the side of the angels” in relation to PPI.

“In that case I can only imagine what would have happenedif we were not on the side of the angels,” said Mr Horta-Osorio.

Among the biggest issues on the agenda for Lloyds is its sale of 632 branches to the Co-op in its Project Verde deal. The transaction has been hit by frequent delays due to its complexity and the concerns of regulators about the ability of the mutual to run the business.

Mr Horta-Osorio confirmed that the Co-op sale remained “Plan A” and that the branches would be rebranded as TSB over the summer as part of the process of separating the business.

Lloyds faces a deadline of November to offload the business under the terms of a state aid deal with the European Commission. If the Co-op is unable to complete the deal, with reports this week suggesting the authorities have identified a £1bn capital shortfall at the mutual, Lloyds is prepared to float the unit on the stock market. Mr Horta-Osorio said a final decision on the sale of the business would be taken by the end of June.

Despite the loss, Britain's biggest retail bank set aside £365m to pay staff bonuses and said it would hand its chief executive, Antonio Horta-Osorio, a deferred share award worth £1.49m.

Mr Horta-Osorio's award will be deferred for five-years and will only pay out if the bank's share price hits the taxpayer's break even price of 73.6p, or if the state is able to sell 33pc of its 39.2pc in the bank for more than 61p.

The board said the conditions support the bank's aim of repaying the taxpayer and Mr Horta-Osório said the bank's "absolute focus" is to get taxpayers' money back and was very confident of doing so.

He said Lloyds was ahead with its revival plan and expected a further big drop in impairments this year and an increase in underlying profit.

The additional mis-selling costs will take the total provisions to cover PPI and the interest rate swap scandal to about £6.8bn.